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Microfinance institution and moneylenders in a segmented rural credit market

Author

Listed:
  • Abhirupa Das
  • Uday Bhanu Sinha

Abstract

Purpose - The effectiveness of microfinance institutions (MFIs) in rescuing poor borrowers from “clutches of” moneylenders has been a much-debated topic over the past few decades. This paper aims to contribute by presenting a model of competition between a socially motivated MFI and profit-maximizing moneylenders when market segmentation exists. Design/methodology/approach - A principal–agent model is used to characterize equilibrium conditions under scenarios where only moneylenders operate, only MFI operates and when both co-exist to pose comparative results effectively. Findings - The authors find unambiguous benefits arising when a welfare-maximizing MFI enters the market. However, there are benefits to having local agents like moneylenders on the ground who also have informational advantages. Originality/value - To the best of authors’ knowledge, this study is the first to evaluate the competition between MFI and moneylenders under the framework of captive and noncaptive segments with a mandatory savings requirement.

Suggested Citation

  • Abhirupa Das & Uday Bhanu Sinha, 2024. "Microfinance institution and moneylenders in a segmented rural credit market," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 17(3), pages 441-469, October.
  • Handle: RePEc:eme:igdrpp:igdr-12-2023-0203
    DOI: 10.1108/IGDR-12-2023-0203
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    More about this item

    Keywords

    Microfinance; Market segmentation; Collateral substitution; Mandatory savings; Information asymmetry; D82; O16;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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